Dec 19 How to Avoid Making Enemies, and be a More Successful Investor

When I applied for a job at one investment management firm I was given a personality test. A few months after I was hired, the partners were discussing their opinion that doing so had helped them avoid some hiring mistakes. I jokingly asked, "so were you looking for a jerk or did I just slip past the screen?"

After a brief, uncomfortable pause, one of the partners replied. "We want someone who will challenge what company management says, form strong opinions, and be prepared to defend them, which I guess could be described that way."

This said, however, those strong opinions are often wrong. In fact, when measured on a relative basis a successful investor need only be right slightly more than half the time. Another element of success is realizing that even the best investors will be wrong nearly half the time, and acting to minimize the risk on those occasions.

As Daniel Kahneman has documented, human brains typically start with a belief, and then finds evidence to support that belief (confirmation bias.) This can get an investor in trouble. The scientific method seeks to avoid this trap by trying to refute, rather than prove, hypotheses. So, once the strong opinion is formed, the job of the investor is to look for evidence that refutes the opinion rather than confirming it. In a sense, to convince ourselves that we actually hold the opposite opinion. The investor who is merely opinionated is indeed a jerk. The investor who is willing to change the opinion when warranted is more successful.

Dale Carnegie noticed the same tendency in human relations. The tendency to seek confirming evidence can make it quite painful for someone to be told that they are wrong. Defenses go up, and the brain seeks out all of the reasons that suggest we are right after all. It is important, when trying to refute their belief, not to try to convince them. Instead, Carnegie suggests framing the discussion as trying to convince yourself. He suggests saying, "I thought otherwise, but I am often wrong. And if I am wrong, I want to know about it and change my view. Let's look at the facts."

By expressing open-mindedness and a willingness to be wrong, we can trigger the same feelings in our counterpart via reciprocity, a potent weapon of influence. And more to the point, we can undertake a less biased examination of the situation and improve our chances of being right (even if it means changing our own mind rather than that of our opponent.)

And each incremental time we can be right beyond 50% improves our odds of success as an investor or an influencer.